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Economy of India

2007 Schools Wikipedia Selection. Related subjects: Economics

   Economy of India
   Currency 1 Indian Rupee (INR) (₨) = 100 Paise
   Fiscal year April 1– March 31
   Trade organisations WTO, SAFTA
   Statistics
   GDP ( PPP) $3.611 trillion (2005 est.) ( 4th )
   GDP growth 8.9% (Q1 2006-07)
   GDP per capita $3,300 (2005 est.)
   GDP by sector agriculture: 18.6%, industry: 27.6%, services: 53.8%
   (2005 est.)
   Inflation ( CPI) 4.2% (2005 est.)
   Pop below poverty line 25% (2002 est.)
   Labour force 496.4 million (2005 est.)
   Labour force by occupation agriculture: 60%, industry: 17%, services:
   23% (1999)
   Unemployment 8.9% (2005 est.)
   Main industries textiles, chemicals, food processing, steel,
   transportation equipment, cement, mining, petroleum, machinery,
   software
   Trading Partners
   Exports $76.23 billion f.o.b. (2005 est.)
   Export goods textile goods, gems and jewelry, engineering goods,
   chemicals, leather manufactures
   Main partners US 18%, China 8.9%, UAE 8.4%, UK 4.7%, Hong Kong 4.2%
   (2005)
   Imports $113.1 billion f.o.b. (2005 est.)
   Imports goods crude oil, machinery, gems, fertilizer, chemicals
   Main Partners China 7.2%, US 6.4%, Belgium 5.1%, Singapore 4.7%,
   Australia 4.2%, Germany 4.2%, UK 4.1% (2005)
   Public finances
   Public debt $125.5 billion (2005 est.)
   Revenues $111.2 billion
   Expenses $135.8 billion; including capital expenditures of $15 billion
   (2005 est.)
   Economic aid recipient: $2.9 billion (FY98/99)
   Main source
   All values, unless otherwise stated, are in US dollars

   The economy of India is the fourth largest in the world as measured by
   purchasing power parity (PPP), with a gross domestic product (GDP) of
   US $3.611 trillion. When measured in USD exchange-rate terms, it is the
   twelfth largest in the world, with a GDP of US $719.8 billion (2005).
   India is the second fastest growing major economy in the world, with a
   GDP growth rate of 8.9% at the end of the first quarter of 2006–2007.
   However, India's huge population results in a per capita income of
   $3200 at PPP and $714 at nominal.

   The economy is diverse and encompasses agriculture, handicrafts,
   textile, manufacturing, and a multitude of services. Although
   two-thirds of the Indian workforce still earn their livelihood directly
   or indirectly through agriculture, services are a growing sector and
   are playing an increasingly important role of India's economy. The
   advent of the digital age, and the large number of young and educated
   populace fluent in English, is gradually transforming India as an
   important 'back office' destination for global companies for the
   outsourcing of their customer services and technical support. India is
   a major exporter of highly-skilled workers in software and financial
   services, and software engineering.

   India followed a socialist-inspired approach for most of its
   independent history, with strict government control over private sector
   participation, foreign trade, and foreign direct investment. However,
   since the early 1990s, India has gradually opened up its markets
   through economic reforms by reducing government controls on foreign
   trade and investment. The privatisation of publicly owned industries
   and the opening up of certain sectors to private and foreign interests
   has proceeded slowly amid political debate.

   India faces a burgeoning population and the challenge of reducing
   economic and social inequality. Poverty remains a serious problem,
   although it has declined significantly since independence, mainly due
   to the green revolution and economic reforms.

History

   India's economic history can be broadly divided into three eras,
   beginning with the pre-colonial period lasting up to the 17th century.
   The advent of British colonisation started the colonial period in the
   17th century, which ended with the independence in 1947. The third
   period stretches from independence in 1947 until the present.

Pre-colonial

   The citizens of the Indus Valley civilisation, a permanent and
   predominantly urban settlement that flourished between 2800 BC and 1800
   BC, practised agriculture, domesticated animals, used uniform weights
   and measures, made tools and weapons, and traded with other cities.
   Evidence of well planned streets, a drainage system and water supply
   reveals their knowledge of urban planning, which included the world's
   first urban sanitation systems and the existence of a form of municipal
   government.
   Silver coin minted during the reign of the Gupta king Kumara Gupta I
   (414–55 AD)
   Enlarge
   Silver coin minted during the reign of the Gupta king Kumara Gupta I
   (414–55 AD)

   The 1872 census revealed that 91.3% of the population of the region
   constituting present-day India resided in villages, whose economies
   were largely isolated and self-sustaining, with agriculture the
   predominant occupation. This satisfied the food requirements of the
   village and provided raw materials for hand-based industries, such as
   textiles, food processing and crafts. Although many kingdoms and rulers
   issued coins, barter was prevalent. Villages paid a portion of their
   agricultural produce as revenue to the rulers, while its craftsmen
   received a part of the crops at harvest time for their services.

   Religion, especially Hinduism, and the caste and the joint family
   systems, played an influential role in shaping economic activities. The
   caste system functioned much like medieval European guilds, ensuring
   the division of labour, providing for the training of apprentices and,
   in some cases, allowing manufacturers to achieve narrow specialisation.
   For instance, in certain regions, producing each variety of cloth was
   the speciality of a particular sub-caste.
   Estimates of the per capita income of India (1857–1900) as per 1948–49
   prices.
   Enlarge
   Estimates of the per capita income of India (1857–1900) as per 1948–49
   prices.

   Superstitions about foreign travel among Hindus meant that a large part
   of India's foreign trade was conducted by foreigners and Muslims.
   Textiles such as muslin, Calicos, shawls, and agricultural products
   such as pepper, cinnamon, opium and indigo were exported to Europe, the
   Middle East and South East Asia in return for gold and silver.

   Assessment of India's pre-colonial economy is mostly qualitative, owing
   to the lack of quantitative information. One estimate puts the revenue
   of Akbar's Mughal Empire in 1600 at £17.5 million, in contrast with the
   total revenue of Great Britain in 1800, which totalled £16 million.
   India, by the time of the arrival of the British, was a largely
   traditional agrarian economy with a dominant subsistence sector
   dependent on primitive technology. It existed alongside a competitively
   developed network of commerce, manufacturing and credit. After the fall
   of the Mughals and the rise of Maratha Empire, the Indian economy was
   plunged into a state of political instability due to internecine wars
   and conflicts.

Colonial

   Colonial rule brought an institutional environment that guaranteed
   property rights, encouraged free trade, and created a single currency
   with fixed exchange rates, metric weights and measures, capital
   markets, a well developed system of railways and telegraphs, a civil
   service that aimed to be free from political interference, and a
   common-law, adversarial legal system. India's colonisation by the
   British coincided with major changes in the world
   economy—industrialisation, and significant growth in production and
   trade. However, at the end of colonial rule, India inherited an economy
   that was one of the poorest in the developing world, with industrial
   development stalled, agriculture unable to feed a rapidly growing
   population, one of the world's lowest life expectancies, and low rates
   of literacy.

   An estimate by Cambridge University historian Angus Maddison reveals
   that India's share of the world income fell from 22.6% in 1700,
   comparable to Europe's share of 23.3%, to a low of 3.8% in 1952. While
   Indian leaders during the Independence struggle, and left-nationalist
   economic historians have blamed colonial rule for the dismal state of
   India's economy in its aftermath, a broader macroeconomic view of India
   during this period reveals that there were sectors of growth and
   decline, resulting from changes brought about by colonialism and a
   world that was moving towards industrialisation and economic
   integration.

Post-independence

   Growth rate of India's real GDP per capita (Constant Prices: Chain
   series) (1950–2006). Data Source: Penn World tables.
   Enlarge
   Growth rate of India's real GDP per capita (Constant Prices: Chain
   series) (1950–2006). Data Source: Penn World tables.

   Indian economic policy after independence was influenced by the
   colonial experience (which was seen by Indian leaders as exploitative
   in nature) and by those leaders' exposure to Fabian socialism. Policy
   tended towards protectionism, with a strong emphasis on import
   substitution, industrialisation, state intervention in labour and
   financial markets, a large public sector, business regulation, and
   central planning. Jawaharlal Nehru, the first prime minister, along
   with the statistician Prasanta Chandra Mahalanobis, formulated and
   oversaw economic policy. They expected favourable outcomes from this
   strategy, because it involved both public and private sectors and was
   based on direct and indirect state intervention, rather than the more
   extreme Soviet-style central command system. The policy of
   concentrating simultaneously on capital- and technology-intensive heavy
   industry and subsidising manual, low-skill cottage industries was
   criticised by economist Milton Friedman, who thought it would waste
   capital and labour, and retard the development of small
   manufacturerers.
   Per capita GDP (at PPP) of South Asian economies versus those of South
   Korea, as a percentage of the US
   Enlarge
   Per capita GDP (at PPP) of South Asian economies versus those of South
   Korea, as a percentage of the US

   India's low average growth rate from 1947–80 was derisively referred to
   as the Hindu rate of growth, because of the unfavourable comparison
   with growth rates in other Asian countries, especially the "East Asian
   Tigers". The economic reforms that caused a surge in economic growth
   after 1980 can be attributed to two stages of reform. The pro-business
   measures of 1980, initiated by Indira Gandhi and continued by Rajiv
   Gandhi, eased restrictions on capacity expansion for incumbents,
   removed price controls and reduced corporate taxes. The economic
   liberalisation of 1991, initiated by then Indian prime minister P. V.
   Narasimha Rao and his finance minister Manmohan Singh in response to a
   balance-of-payments crisis, did away with the Licence Raj (investment,
   industrial and import licensing) and ended many public monopolies,
   allowing automatic approval of foreign direct investment in many
   sectors. Since then, the overall direction of liberalisation has
   remained the same, irrespective of the ruling party, although no party
   has yet tried to take on powerful lobbies such as the trade unions and
   farmers, or contentious issues such as reforming labour laws and
   reducing agricultural subsidies.

          See also: Timeline of the economy of India Since 1990, India has
          emerged as one of the wealthiest economies in the developing
          world; during this period, the economy has grown constantly with
          only a few major setbacks. This has been accompanied by
          increases in life expectancy, literacy rates and food security.

Government intervention

State planning and the mixed economy

   After independence, India opted for a centrally planned economy to try
   to achieve an effective and equitable allocation of national resources
   and balanced economic development. The process of formulation and
   direction of the Five-Year Plans is carried out by the Planning
   Commission, headed by the Prime Minister of India as its chairperson.
   The number of people employed in non-agricultural occupations in the
   public and private sectors. Totals are rounded. Private sector data
   relates to non-agriculture establishments with 10 or more employees.
   Enlarge
   The number of people employed in non-agricultural occupations in the
   public and private sectors. Totals are rounded. Private sector data
   relates to non-agriculture establishments with 10 or more employees.

   India's mixed economy combines features of both capitalist market
   economy and the socialist command economy, but has shifted more towards
   the former over the past decade. The public sector generally covers
   areas which are deemed too important or not profitable enough to leave
   to the market, including such services as the railways and postal
   system.

   Since independence, there have been phases of nationalising such areas
   as banking and, more recently, of privatisation.

Public expenditure

   India's public expenditure is classified as development expenditure,
   comprising central plan expenditure and central assistance and
   non-development expenditures; these categories can each be divided into
   capital expenditure and revenue expenditure. Central plan expenditure
   is allocated to development schemes outlined in the plans of the
   central government and public sector undertakings; central assistance
   refers to financial assistance and developmental loans given for plans
   of the state governments and union territories. Non-development capital
   expenditure comprises of capital defense expenditure, loans to public
   enterprises, states and union territories and foreign governments,
   while non-development revenue expenditure comprises revenue defence
   expenditure, administrative expenditure, subsidies, debt relief to
   farmers, postal deficit, pensions, social and economic services
   (education, health, agriculture, science and technology), grants to
   states and union territories and foreign governments.
   Headquarters of India's central bank, the Reserve Bank of India, in
   Mumbai.
   Enlarge
   Headquarters of India's central bank, the Reserve Bank of India, in
   Mumbai.

   India's non-development revenue expenditure has increased nearly
   five-fold in 2003–04 since 1990–91 and more than ten-fold since
   1985–1986. Interest payments are the single largest item of expenditure
   and accounted for more than 40% of the total non development
   expenditure in the 2003–04 budget. Defence expenditure increased
   four-fold during the same period and has been increasing due to growing
   tensions in the region, the expensive dispute with Pakistan over Jammu
   and Kashmir and an effort to modernise the military. Administrative
   expenses are compounded by a large salary and pension bill, which rises
   periodically due to revisions in wages, dearness allowance etc.
   subsidies on food, fertilizers, education and petroleum and other merit
   and non-merit subsidies account are not only continuously rising,
   especially because of rising crude oil and food prices, but are also
   harder to rein in, because of political compulsions.

Public receipts

   India has a three-tier tax structure, wherein the constitution empowers
   the union government to levy Income tax, tax on capital transactions (
   wealth tax, inheritance tax, gift tax), sales tax, service tax, customs
   and excise duties and the state governments to levy sales tax on
   intra-state sale of goods, tax on entertainment and professions, excise
   duties on manufacture of alcohol, stamp duties on transfer of property
   and collect land revenue (levy on land owned). The local governments
   are empowered by the state government to levy property tax, Octroi and
   charge users for public utilities like water supply, sewage etc. More
   than half of the revenues of the union and state governments come from
   taxes, of which half come from Indirect taxes. More than a quarter of
   the union government's tax revenues is shared with the state
   governments.

   The tax reforms, initiated in 1991, have sought to rationalise the tax
   structure and increase compliance by taking steps in the following
   directions:
     * Reducing the rates of individual and corporate income taxes,
       excises, customs and making it more progressive
     * Reducing exemptions and concessions
     * Simplification of laws and procedures
     * Introduction of Permanent account number to track monetary
       transactions
     * 21 of the 29 states introduced Value added tax (VAT) on April 1,
       2005 to replace the complex and multiple sales tax system

   The non-tax revenues of the central government come from fiscal
   services, interest receipts, public sector dividends, etc., while the
   non-tax revenues of the States are grants from the central government,
   interest receipts, dividends and income from general, economic and
   social services.

   Inter-State share in the federal tax pool is decided by the
   recommendations of the Finance Commission to the President.

General budget

   The Finance minister of India presents the annual union budget in the
   Parliament on the last working day of February. The budget has to be
   passed by the Lok Sabha before it can come into effect on April 1, the
   start of India's fiscal year. The Union budget is preceded by an
   economic survey which outlines the broad direction of the budget and
   the economic performance of the country for the outgoing financial
   year.

   India's union budget for 2005–06, had an estimated outlay of
   Rs.5,14,344 crores ($118 billion). Earnings from taxes amount to Rs.
   2,73,466 crore ($63b). India's fiscal deficit amounts to 4.5% or
   1,39,231 crore ($32b).

Currency System

Rupee

   The Rupee is the only legal tender accepted in India. The exchange rate
   as of 29 July 2006 is about 46.53 to a US dollar, 59.316 to a Euro, and
   86.755 to a UK pound. This makes a crore rupees (Rs. 10,000,000)
   approximately equal to $214,915, €168,588, or £115,267. The Indian
   rupee is accepted as legal tender in the neighbouring Nepal and Bhutan,
   both of which peg their currency to that of the Indian rupee. The rupee
   is divided into 100 paise. The highest-denomination banknote is the
   1,000 rupee note; the lowest-denomination coin in circulation is the 25
   p coin.

Exchange rates

   Values of the US$ (blue) and UK£ (red) have risen over the past 25
   years.
   Enlarge
   Values of the US$ (blue) and UK£ (red) have risen over the past 25
   years.

   Under the fixed exchange rate system, the value of the rupee was linked
   to the British pound sterling till 1946, and after independence, 30% of
   India's foreign trade was determined in pound sterling. In 1975, as per
   the floating exchange rate system, the value of the rupee was pegged to
   a basket of currencies and was tightly controlled by the Reserve Bank
   of India. In recent years its value has depreciated with respect to
   most currencies with the exception of the U.S. dollar.

   Since liberalisation, the rupee is fully convertible on trade and
   current account. The former has enabled Indian businessmen and workers
   to convert their earnings abroad into rupee at market rates, while the
   latter has removed all restrictions on foreign exchange for current
   business transactions as well as travel, education, medical expenses,
   etc. India has committed to gradually move towards full convertibility,
   albeit with some restrictions on capital accounts, in order to
   encourage two-way flow of capital and investment.

Determinants

Demographics

   India, with a population of 1.095 billion people, is the second most
   populous country in the world, accounting for one in six human beings
   of the Earth's population. Growth rate of population has decreased from
   a compound annual growth rate of 2.15 (1951–81) to 1.38% (2005–06),
   despite the decrease in the death rates owing to improvements in health
   care.

   The large population puts further pressure on infrastructure and social
   services. A positive factor has been the large working-age population,
   which forms 45.33% of the population and is expected to increase
   substantially, because of the decreasing dependency ratio. Increased
   rates of literacy, better health care and self-sufficiency in food
   production in recent times have ensured that a large population has not
   caused any serious problems. The national labour market has been
   tightly regulated by successive governments ever since the Workmen's
   Compensation Act was passed in 1923.

Physical infrastructure

   Cheap and environment friendly public transport is seen as a necessity
   for India's crowded and polluted metros. Pictured here, is the New
   Delhi Metro, operational since 2002 and seen as a model for other
   metros.
   Enlarge
   Cheap and environment friendly public transport is seen as a necessity
   for India's crowded and polluted metros. Pictured here, is the New
   Delhi Metro, operational since 2002 and seen as a model for other
   metros.

   Since independence, India has allocated nearly half of the total outlay
   of the five-year plans for infrastructural development. Much of the
   total outlay was spent on large projects in the area of irrigation,
   energy, transport, communications and social overheads. Development of
   infrastructure was completely in the hands of the public sector and was
   plagued by corruption, bureaucratic inefficiencies, urban-bias and an
   inability to scale investment.

   India's low spending on power, construction, transportation,
   telecommunications and real estate, at $31 billion or 6% of GDP,
   compared to China's spending of $260 billion or 20% of its GDP in 2002
   has prevented India from sustaining a growth rate of around 8%. This
   has prompted the government to partially open up infrastructure to the
   private sector allowing foreign investment. India holds second position
   in the world in roadways' construction, more than twice that of China.

   As of 31 December 2005, there were an estimated 835,000 broadband lines
   in India. Low tele-density is the major hurdle for slow pickup in
   broadband services. Over 76% of the broadband lines were via DSL and
   the rest via cable modems.

Politics

   India, a federal republic, has had stable democratic governments since
   independence. Politics is dominated by the centre-left Indian National
   Congress (INC), the right-wing Bharatiya Janata Party (BJP), the
   left-wing Communist Party of India (CPI) and CPI (Marxist) and various
   regional parties, which are either centre-right or centre-left. Despite
   the varied political spectrums they occupy, the necessity of forming
   coalitions for government formation, the growing middle class that
   generally favours liberalisation and tightening fiscal deficits,
   especially at the state levels, has meant that all political parties
   adopt a moderate view towards economic reforms.

Financial institutions

   India has set up Special Economic Zones and software parks that offer
   tax benefits and better infrastructure to set up business. Pictured
   here is the Tidel Park in Chennai, one of the largest software parks in
   India.
   Enlarge
   India has set up Special Economic Zones and software parks that offer
   tax benefits and better infrastructure to set up business. Pictured
   here is the Tidel Park in Chennai, one of the largest software parks in
   India.

   At the time of Independence, India inherited several institutions like
   the civil services, central bank, railways, etc., from her British
   rulers. Mumbai serves as the nation's commercial capital, with the
   Reserve Bank of India (RBI), Bombay Stock Exchange (BSE) and the
   National Stock Exchange (NSE) located here. The headquarters of many
   financial institutions are also located within the city.

   The RBI, the country's central bank was established on 1 April 1935. It
   serves as the nation's monetary authority, regulator and supervisor of
   the financial system, manager of exchange control and as an issuer of
   currency. The RBI is governed by a central board, headed by a governor
   who is appointed by the Central government of India.

   The BSE Sensex or the BSE Sensitive Index is a value-weighted index
   composed of 30 companies with April 1979 as the base year (100). These
   companies have the largest and most actively traded stocks and are
   representative of various sectors, on the Exchange. They account for
   around one-fifth of the market capitalisation of the BSE. The Sensex is
   generally regarded as the most popular and precise barometer of the
   Indian stock markets. Incorporated in 1992, the National Stock Exchange
   is one of the largest and most advanced stock markets in India. The NSE
   is the world's third largest stock exchange in terms of transactions.
   There are a total of 23 stock exchanges in India, but the BSE and NSE
   comprise 83% of the volumes. The Securities and Exchange Board of India
   (SEBI), established in 1992, regulates the stock markets and other
   securities markets of the country.

Sectors

Agriculture

   Given below is a chart of trend of output of cereals and major
   foodgrains as published by the Department of Food and Public
   Distribution with figures in tonnes.
    Year     Cereals      Rice      Wheat    Coarsegrains   Pulses
   2001–02 199,480,000 93,340,000 72,770,000 33,370,000   13,370,000
   2004–05 192,730,000 87,800,000 73,030,000 31,880,000   13,670,000
   Composition of India's total production (million tonnes) of foodgrains
   and commercial crops, in 2003-04.
   Enlarge
   Composition of India's total production (million tonnes) of foodgrains
   and commercial crops, in 2003-04.

   India ranks second worldwide in farm output. Agriculture and allied
   sectors like forestry, logging and fishing accounted for 18.6% of the
   GDP in 2005, employed 60% of the total workforce and despite a steady
   decline of its share in the GDP, is still the largest economic sector
   and plays a significant role in the overall socio-economic development
   of India. Yields per unit area of all crops have grown since 1950, due
   to the special emphasis placed on agriculture in the five-year plans
   and steady improvements in irrigation, technology, application of
   modern agricultural practices and provision of agricultural credit and
   subsidies since the green revolution. However, international
   comparisons reveal that the average yield in India is generally 30% to
   50% of the highest average yield in the world.

   The low productivity in India is a result of the following factors:
     * Illiteracy, general socio-economic backwardness, slow progress in
       implementing land reforms and inadequate or inefficient finance and
       marketing services for farm produce.
     * The average size of land holdings is very small (less than 20,000
       m²) and are subject to fragmentation, due to land ceiling acts and
       in some cases, family disputes. Such small holdings are often
       over-manned, resulting in disguised unemployment and low
       productivity of labour.
     * Adoption of modern agricultural practices and use of technology is
       inadequate, hampered by ignorance of such practices, high costs and
       impracticality in the case of small land holdings.
     * Irrigation facilities are inadequate, as revealed by the fact that
       only 53.6% of the land was irrigated in 2000–01, which result in
       farmers still being dependent on rainfall, specifically the Monsoon
       season. A good monsoon results in a robust growth for the economy
       as a whole, while a poor monsoon leads to a sluggish growth. Farm
       credit is regulated by NABARD, which is the statutory apex agent
       for rural development in the subcontinent.

Industry

   CAPTION: India's 5 leading companies, as per Forbes Global 2000 ranking
                                                                 for 2005.

                                 Global
                                ranking                            Company
                                    265    Oil and Natural Gas Corporation
                                    269          State Bank of India Group
                                    279             Indian Oil Corporation
                                    309        Reliance Industries Limited
                                    486 National Thermal Power Corporation

   India ranks fourteenth worldwide in factory output. Concerted efforts
   at industrialisation by the government, aiming at self-sufficiency in
   production and protection from foreign competition, for nearly four
   decades since independence, have encouraged a diverse (though small)
   industrial base. They together account for 27.6% of the GDP and employ
   17% of the total workforce. Economic reforms brought foreign
   competition, led to privatisation of certain public sector industries,
   opened up sectors hitherto reserved for the public sector and led to an
   expansion in the production of fast-moving consumer goods.

   Post-liberalisation, the Indian private sector, which was usually run
   by oligopolies of old family firms and required political connections
   to prosper was faced with foreign competition, including the threat of
   cheaper Chinese imports. It has since handled the change by squeezing
   costs, revamping management, focusing on designing new products and
   relying on low labour costs and technology.

   Six Indian companies have been listed in the Fortune Global 500 list
   for the year 2006 . They are:
     * Rank 153 - Indian Oil Corporation Ltd.
     * Rank 342 - Reliance Industries Ltd.
     * Rank 368 - Bharat Petroleum Corporation Ltd.
     * Rank 378 - Hindustan Petroleum Corporation Ltd.
     * Rank 402 - Oil and Natural Gas Corporation Ltd.
     * Rank 498 - State Bank Of India Ltd.

Services

   Per capita net state domestic product (NSDP) of Indian states in
   1997-1998. (Darker states have higher per capita NSDP)
   Enlarge
   Per capita net state domestic product (NSDP) of Indian states in
   1997-1998. (Darker states have higher per capita NSDP)

   India ranks fifteenth worldwide in services' output. Still, this
   sector, providing employment to 23% of the work force, is the fastest
   growing sector, with a growth rate of 7.5% in 1991–2000 up from 4.5% in
   1951–80. It has the largest share in the GDP, accounting for 53.8% in
   2005 up from 15% in 1950. Business services ( information technology,
   information technology enabled services, business process outsourcing)
   services are among the fastest growing sectors contributing to one
   third of the total output of services in 2000. The growth in the IT
   sector is attributed to increased specialisation, availability of a
   large pool of low cost, but highly skilled, educated and fluent
   English-speaking workers on the supply side and on the demand side,
   increased demand from foreign consumers interested in India's service
   exports or those looking to outsource their operations. India's IT
   industry, despite contributing significantly to its balance of
   payments, accounted for only about 1% of the total GDP or 1/50th of the
   total services. Excellent infrastructure in the service sector and the
   lowest communication cost has helped India to be a dominant player in
   these sectors.

Banking and finance

   Structure of the organised banking sector in India. Number of banks are
   in brackets.
   Enlarge
   Structure of the organised banking sector in India. Number of banks are
   in brackets.

   The Indian money market is classified into: the organised sector
   (comprising private, public and foreign owned commercial banks and
   cooperative banks, together known as scheduled banks); and the
   unorganised sector (comprising individual or family owned indigenous
   bankers or money lenders and non-banking financial companies (NBFCs)).
   The unorganised sector and microcredit are still preferred over
   traditional banks in rural and sub-urban areas, especially for
   non-productive purposes, like ceremonies and short duration loans.

   Prime Minister Indira Gandhi nationalised 15 banks in 1969, followed by
   six others in 1980, and made it mandatory for banks to provide 40%
   (since reduced to 10%) of their net credit to priority sectors like
   agriculture, small-scale industry, retail trade, small businesses, etc.
   to ensure that the banks fulfill their social and developmental goals.
   Since then, the number of bank branches has increased from 10,120 in
   1969 to 98,910 in 2003 and the population covered by a branch decreased
   from 63,800 to 15,000 during the same period. The total deposits
   increased 32.6 times between 1971 to 1991 compared to 7 times between
   1951 to 1971. Despite an increase of rural branches, from 1,860 or 22%
   of the total number of branches in 1969 to 32,270 or 48%, only 32,270
   out of 5 lakh (500,000) villages are covered by a scheduled bank.

   Since liberalisation, the government has approved significant banking
   reforms. While some of these relate to nationalised banks (like
   encouraging mergers, reducing government interference and increasing
   profitability and competitiveness), other reforms have opened up the
   banking and insurance sectors to private and foreign players.

Socio-economic characteristics

Poverty

   The recent economic developments have primarily helped upper- and
   middle-class Indians. While poverty in India has reduced significantly,
   22% of Indians still live below the poverty line. Since the early
   1950s, successive governments have implemented various schemes, under
   planning, to alleviate poverty, that have met with partial success. All
   these programmes have improved upon the strategies of the Food for work
   programme and National Rural Employment Programme of the 1980s, which
   attempted to use the unemployed to generate productive assets and build
   rural infrastructure. In August 2005, the Indian parliament passed the
   Rural Employment Guarantee Bill, the largest programme of this type in
   terms of cost and coverage, which promises 100 days of minimum wage
   employment to every rural household in 200 of India's 600 districts.
   The question of whether economic reforms have reduced poverty or not
   has fuelled debates without generating any clear cut answers and has
   also put political pressure on further economic reforms, especially
   those involving the downsizing of labour and cutting agricultural
   subsidies.

Corruption

   Extent of corruption in Indian states, as measured in a 2005 study by
   Transparency International India. (Darker regions are more corrupt)
   Enlarge
   Extent of corruption in Indian states, as measured in a 2005 study by
   Transparency International India. (Darker regions are more corrupt)

   Corruption has been one of the pervasive problems affecting India. It
   takes the form of bribes, evasion of tax and exchange controls,
   embezzlement, etc. The economic reforms of 1991 reduced the red tape,
   bureaucracy and the Licence Raj that had strangled private enterprise
   and was blamed for the corruption and inefficiencies. Yet, a 2005 study
   by Transparency International (TI) India found that more than half of
   those surveyed had firsthand experience of paying bribe or peddling
   influence to get a job done in a public office.

   The chief economic consequences of corruption are the loss to the
   exchequer, an unhealthy climate for investment and an increase in the
   cost of government-subsidised services. The TI India study estimates
   the monetary value of petty corruption in 11 basic services provided by
   the government, like education, healthcare, judiciary, police, etc., to
   be around Rs.21,068 crores. India still ranks in the bottom quartile of
   developing nations in terms of the ease of doing business, and compared
   to China, the average time taken to secure the clearances for a startup
   or to invoke bankruptcy is much greater.

   The Right to Information Act (2005) and equivalent acts in the states,
   that require government officials to furnish information requested by
   citizens or face punitive action, computerisation of services and
   various central and state government acts that established vigilance
   commissions have considerably reduced corruption or at least have
   opened up avenues to redress grievances. The latest report by
   Transparency International puts India at 70th place and states that
   significant improvements was made by India in reducing corruption.

Occupations and unemployment

   57% of the workforce is in agriculture, which contributes to 25% of the
   GDP.
   Enlarge
   57% of the workforce is in agriculture, which contributes to 25% of the
   GDP.

   Agricultural and allied sectors accounted for about 57% of the total
   workforce in 1999–2000, down from 60% in 1993–94. While agriculture has
   faced stagnation in growth, services have seen a steady growth. Of the
   total workforce, 8% is in the organised sector, two-thirds of which are
   in the public sector. The NSSO survey estimated that in 1999–2000, 106
   million, nearly 10% of the population were unemployed and the overall
   unemployment rate was 7.32%, with rural areas doing marginally better
   (7.21%) than urban areas (7.65%).

   Unemployment in India is characterised by chronic underemployment or
   disguised unemployment. Government schemes that target eradication of
   both poverty and unemployment, attempt to solve the problem, by
   providing financial assistance for setting up businesses, skill honing,
   setting up public sector enterprises, reservations in governments, etc.
   The decreased role of the public sector after liberalisation has
   further underlined the need for focusing on better education and has
   also put political pressure on further reforms.

Regional imbalance

   One of the critical problems facing India's economy is the sharp and
   growing regional variations among India's different states and
   territories in terms of per capita income, poverty, availability of
   infrastructure and socio-economic development.

   The five-year plans have attempted to reduce regional disparities by
   encouraging industrial development in the interior regions, but
   industries still tend to concentrate around urban areas and port cities
   After liberalization, the more advanced states are better placed to
   benefit from them, with infrastructure like well developed ports,
   urbanisation and an educated and skilled workforce which attract
   manufacturing and service sectors. The union and state governments of
   backward regions are trying to reduce the disparities by offering tax
   holidays, cheap land, etc., and focusing more on sectors like tourism,
   which although being geographically and historically determined, can
   become a source of growth and is faster to develop than other sectors.

External trade and investment

Global trade relations

            CAPTION: Share of top five investing countries in FDI inflows.
                                                             (1991–2004)

     Rank                                Country       Inflows
                                                 (Million USD) Inflows (%)
        1           Flag of Mauritius  Mauritius         8,898      34.49%
        2   Flag of United States  United States         4,389      17.08%
        3                   Flag of Japan  Japan         1,891       7.33%
        4       Flag of Netherlands  Netherlands         1,847       7.16%
        5 Flag of United Kingdom  United Kingdom         1,692       6.56%

   Until the liberalisation of 1991, India was largely and intentionally
   isolated from the world markets, to protect its fledging economy and to
   achieve self-reliance. Foreign trade was subject to import tariffs,
   export taxes and quantitative restrictions, while foreign direct
   investment was restricted by upper-limit equity participation,
   restrictions on technology transfer, export obligations and government
   approvals; these approvals were needed for nearly 60% of new FDI in the
   industrial sector. The restrictions ensured that FDI averaged only
   around $200M annually between 1985 and 1991; a large percentage of the
   capital flows consisted of foreign aid, commercial borrowing and
   deposits of non-resident Indians.
   The Bombay Stock Exchange is one of the two largest stock markets in
   India. Its index is used to gauge the strength of the Indian economy.
   Enlarge
   The Bombay Stock Exchange is one of the two largest stock markets in
   India. Its index is used to gauge the strength of the Indian economy.

   India's exports were stagnant for the first 15 years after
   independence, due to the predominance of tea, jute and cotton
   manufactures, demand for which was generally inelastic. Imports in the
   same period consisted predominantly of machinery, equipment and raw
   materials, due to nascent industrialisation. Since liberalisation, the
   value of India's international trade has become more broad-based and
   has risen to Rs. 63,080,109 crores in 2003–04 from Rs.1,250 crores in
   1950–51. India's major trading partners are China, the US, the UAE, the
   UK, Japan and the EU. The exports during August 2006 were $10.3 billion
   up by 41.14% and import were $13.87 billion with an increase of 32.16%
   over the previous year .

   India is a founding-member of General Agreement on Tariffs and Trade
   (GATT) since 1947 and its successor, the World Trade Organization.
   While participating actively in its general council meetings, India has
   been crucial in voicing the concerns of the developing world. For
   instance, India has continued its opposition to the inclusion of such
   matters as labour and environment issues and other non-tariff barriers
   into the WTO policies.

Balance of payments

   Since independence, India's balance of payments on its current account
   has been negative. Since liberalisation in the 1990s (precipitated by a
   balance of payment crisis), India's exports have been consistently
   rising, covering 80.3% of its imports in 2002–03, up from 66.2% in
   1990–91. Although India is still a net importer, since 1996–97, its
   overall balance of payments (i.e., including the capital account
   balance), has been positive, largely on account of increased foreign
   direct investment and deposits from non-resident Indians; until this
   time, the overall balance was only occasionally positive on account of
   external assistance and commercial borrowings. As a result, India's
   foreign currency reserves stood at $141bn in 2005–06.
   India is a net importer: in 2005, imports were $89.33bn and exports
   $69.18bn.
   Enlarge
   India is a net importer: in 2005, imports were $89.33bn and exports
   $69.18bn.

   India's reliance on external assistance and commercial borrowings has
   decreased since 1991–92, and since 2002–03, it has gradually been
   repaying these debts. Declining interest rates and reduced borrowings
   decreased India's debt service ratio to 14.1% in 2001–02, from 35.3% in
   1990–91.

Foreign direct investment in India

   As the fourth-largest economy in the world, India is undoubtedly one of
   the most preferred destinations for foreign direct investments (FDI);
   India has strength in information technology and other significant
   areas such as auto components, chemicals, apparels, pharmaceuticals and
   jewellery. India has always held promise for global investors, but its
   rigid FDI policies were a significant hindrance in this regard.
   However, as a result of a series of ambitious and positive economic
   reforms aimed at deregulating the economy and stimulating foreign
   investment, India has positioned itself as one of the front-runners of
   the rapidly growing Asia Pacific Region. India has a large pool of
   skilled managerial and technical expertise. The size of the
   middle-class population at 300 million exceeds the population of both
   the US and the EU, and represents a powerful consumer market.

   India's recently liberalised FDI policy (2005) allows up to a 100% FDI
   stake in ventures. Industrial policy reforms have substantially reduced
   industrial licensing requirements, removed restrictions on expansion
   and facilitated easy access to foreign technology and foreign direct
   investment FDI. The upward moving growth curve of the real-estate
   sector owes some credit to a booming economy and liberalized FDI
   regime. In March 2005, the government amended the rules to allow 100
   per cent FDI in the construction business. This automatic route has
   been permitted in townships, housing, built-up infrastructure and
   construction development projects including housing, commercial
   premises, hotels, resorts, hospitals, educational institutions,
   recreational facilities, and city- and regional-level infrastructure.

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